What Is a Preference Payment and Can a Trustee Recover It?

Picture a business owner who, a few weeks before a Chapter 11 filing, finally pays the one supplier who has been calling every morning. Or an individual who repays a $10,000 loan from a sibling a few months before filing a Chapter 7 case. Both payments feel responsible. Both may be clawed back. That is the counterintuitive world of preference payments, and it surprises debtors and creditors in roughly equal measure.

The Logic Behind Preference Law

Bankruptcy is built on the idea that similarly situated creditors should be treated alike. If a debtor could pick favorites on the eve of filing, the loudest or closest creditors would walk away paid while everyone else split the rest. Preference law undoes that race.

Under 11 U.S.C. § 547(b), a trustee (or, in a Chapter 11 case, the debtor in possession) can generally recover a transfer if all of the following are true:

• It was made to or for the benefit of a creditor
• It paid a debt that already existed, rather than something purchased at the time
• The debtor was insolvent when it was made, which the law presumes during the 90 days before filing
• It occurred within 90 days of the bankruptcy, or within one year if the creditor was an insider such as a relative, business partner, or officer
• It allowed the creditor to receive more than it would have received in a liquidation

Notice what is missing from that list: bad intent. A creditor who did nothing wrong, and who may not have known the debtor was struggling, can still be required to return the money. Once it does, the creditor holds an unsecured claim in the case for that amount.

Defenses and Thresholds That Change the Math

Section 547(c) gives creditors several defenses. Payments made in the ordinary course of business, on ordinary terms, are protected. So is a genuinely contemporaneous exchange, like paying cash on delivery. A creditor that kept shipping goods or providing services after receiving a payment may reduce its exposure through the “subsequent new value” defense.

There are dollar floors as well. In consumer cases, a trustee cannot pursue transfers to a single creditor that total less than $600. Where the debts are not primarily consumer debts, the floor is currently $8,575, a figure adjusted for inflation every three years.

Why the Insider Rule Matters Most

The one-year lookback for insiders is where individuals and small business owners most often get into trouble. Repaying a parent or a co-owner is frequently the most emotionally urgent payment before a filing. It is also the easiest for a trustee to spot, because it must be disclosed in the bankruptcy paperwork. Paying family first rarely protects them. More often, it pulls them into litigation.

That is why strategy matters before the petition is filed. Knowing which payments fall inside the window, and whether a defense applies, can reduce or eliminate exposure.

Talk to Us Before a Payment Becomes a Lawsuit

Maybe you are planning a filing and worried about payments you already made. Maybe your company just received a demand letter from a trustee seeking money you were paid months ago. Either way, the answer turns on dates, amounts, and relationships. Our West Palm Beach bankruptcy attorneys at Kelley Kaplan Delaney & Eller, PLLC handle preference matters for debtors and creditors alike, and seeing both sides helps us find the strongest position quickly. Call our office to have your situation reviewed.

Source:

federalregister.gov/documents/2025/02/04/2025-02207/adjustment-of-certain-dollar-amounts-applicable-to-bankruptcy-cases